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New York City Mutual Savings Bank Portfolio Management and Trustee Objectives

Published online by Cambridge University Press:  11 May 2010

Alan L. Olmstead
Alan L. Olmstead
Affiliation:
University of California, Davis
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Extract

This article addresses the issue of what made early mutual savings bank trustees tick. It explores two hypotheses: (1) trustees were trying to maximize their depositors’ “well-being” by maximizing the real rate of return on their banks’ portfolios given legal constraints; (2) trustees were trying to profit from their positions. These two hypotheses are tested using investment data drawn from the archives of several of New York's oldest mutuals. Besides offering insights into the objectives of early trustees, the analysis of mutual portfolios will also shed light on several broader issues dealing with capital market efficiency and the effect of legal constraints on resource allocation.

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Articles
Information
The Journal of Economic History , Volume 34 , Issue 4 , December 1974 , pp. 815 - 834
Copyright
Copyright © The Economic History Association 1974

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References

I would like to thank Professors Ralph Andreano, Victor P. Goldberg, Donald D. Hester, Thomas Mayer, C. Daniel Vencill, and Jeffrey G. Williamson for their comments. I also am indebted to the officers of several New York City mutual savings banks who allowed me access to their banks’ records and provided research facilities. Miss Anna M. Flaherty, retired Vice-President of the New York Bank for Savings, and Miss Mildred M. Berg, Vice-President of the Seamen's Bank for Savings, were particularly helpful.

1 Davis, Lance E., “The New England Textile Mills and the Capital Markets: A Study of Industrial Borrowing 1840–1860,” The Journal Of Economic History, XX (March 1960), 4.Google Scholar

2 Vatter, Barbara, “Industrial Borrowing by the New England Textile Mills, 1840–1860: A Comment,” The Journal Of Economic History, XXI (June 1961), 216–221.CrossRefGoogle Scholar

3 Davis, Lance E., “Mrs. Vatter on Industrial Borrowing: A Reply,” The Journal of Economic History, XXI (June 1961), 225.Google Scholar

4 Myers, Gustavus, History of the Great American Fortunes, 3 Vols. (Chicago: C. H. Kerr and Company, 1910).Google Scholar

5 Keyes, Emerson, A History of Savings Banks in the United States, Vol. I (New York: Bradford Rhodes, 1876), p. 356.Google Scholar

6 For a discussion of the importance of legal constraints see Olmstead, Alan L., “Investment Constraints and New York City Mutual Savings Bank Financing of Antebellum Development,” The Journal of Economic History, XXXII (December 1972), 811–840.CrossRefGoogle Scholar

7 If a bank had a good experience with one type of investment it might favor it when making current decisions. Alternatively, a bank which had a large percentage of its portfolio tied up in government bonds (perhaps because of previous constraints) might avoid buying more bonds in an effort to diversify its portfolio.

8 For example, see Davis, “The New England Textile Mills,” p. 20, and Olmstead, “Investment Contraints,” pp. 818–833.

9 Finally, even if we find similar investments and thus convergence, this does not constitute proof that the trustees of the various banks were in fact consciously making similar responses to market signals. At least conceivably this result could happen fortuitously, or it could reflect collusive arrangements between the banks.

10 The Bank for Savings in the City of New York (now the New York Bank for Savings) was founded in 1819, the Seamen's in 1829, the Greenwich in 1833, and the Bowery in 1834. There are no data for the Greenwich for 1837, 1843 and 1846 through 1855, and only partial data exists for the Seamen's for 1850 and 1851.

It should be emphasized that the convergence noted in Figures 1 and 2 reflects similar marginal investment made each year. For example, if one plots the yearly change in die mortgage holdings of the Bank for Savings, the Seamen's and the Bowery, the direction of change is the same in every year from 1850 through 1861. The direction of the change in the government bond holdings of these three banks was the same in eight of the ten years from 1852 through 1861.

11 In 1842 the Seamen's trustees turned down several requests for loans with the explanation that it was “inexpedient at present … to loan money on real estate.” Secretary's Minutes, Seamen's Bank for Savings, Vol. I, April 6, 1842.Google Scholar

12 The amounts cited above are all par values. In 1835 the Bank bought $300,000 (par) of Alabama 4 percent bonds at an average price of 93 percent of par. In 1849 these bonds were selling at 75 percent of par. In 1835 the Bank purchased $100,000 (par) of Indiana 5 percent bonds at an average price of 94 percent of par. In 1848 these bonds were quoted at approximately 50 percent of par. In 1849 the Bank held about $270,000 of Pennsylvania 5 percent bonds which was part of a series of purchases made between 1831 and 1834 for which the Bank paid a premium of several percent. In 1848 this type of bond was quoted at about 74 percent; in 1849 the price rose to about 90 percent of par. Minutes of the Trustees of the Bank for Savings in the City of New York, Vol. III, February 4, 1832, p. 872; January 1, 1833, p. 940; January 1, 1834, p. 1017; January 1, 1835, p. 1088; January 1, 1836, p. 1187; April 13, 1836, p. 1121; Banker's Magazine and State Financial Register, Vol. III (1849), p. 573; Vol. IV (1849–1850), pp. 82, 496, 762–763, 1053.

Ohio debt had returned to par or above by the late 1840's, but in the early 1840's this state's debt was selling for about 70 percent of par. See Bogart, Ernest L., Internal Improvements and State Debt in Ohio (New York: Longmans, Green, 1924), pp 174–177.Google Scholar

13 Conversations with Professor Donald Hester, summer, 1969.

14 The comparison with present-day behavior supplies at best a relative indication of nineteenth-century mutual efficiency. Perhaps a more relevant comparison would be with contemporary intermediaries (e.g., insurance companies, commercial banks, etc.). In any case the mere fact that the banks faced less binding legal constraints over time and thus could and did invest in a broader market is enough to suggest that their assets were probably being allocated more efficiently as time passed.

15 “The Usury Laws,” The Banker's Magazine and State Financial Register, Vol. IV (February 1850), p. 585.Google Scholar Also see Banker's Magazine, VII (December 1857) p.Google Scholar

16 In some cases more than two sets of books containing the same information still exist. In these instances one set was a rough copy, obviously written on the spot; the other set was a final draft copied from the rough copy and meant to be preserved. The rough copies never reported a different rate of interest than found in the “official copies.”

17 This conclusion is particularly important since Davis made extensive use of records from borrowers as well as lenders. Lance Davis, “The New England Textile Mills,” pp. 3–4.

18 Ogden was elected to the board in 1843. By 1845, as a result of his enthusiasm, he was elected to the position of secretary. He held this time-consuming post until 1861 when he took over the daily management of the Bank, being elected to the newly created office of the comptroller.

19 “The Usury Laws,” The Banker's Magazine, p. 584.

20 Ibid., p. 584.

21 Vatter, “A Comment,” pp. 216–221.

22 This conclusion need not follow from Ogden's statement because under varying assumptions it is possible that a profiteering trustee could favor or oppose repeal of the usury law. The assumption implicitly made above (as well as in Professor Vatter's “Comment”) is that a profiteer would favor retaining the usury law because it offered the opportunity to discriminate in favor of friends and still remain within moral and legal bounds. An alternative formulation is that a profiteering trustee might favor repeal if he were an efficient price discriminator. He could then charge higher intere st rates to outsiders when die equilibrium interest rate exceeded 7 percent; this would allow him to loan to insiders at interest rates even lower than 7 percent and still cover costs. But if the latter formulation prevailed, we would expect to find mutuals violating the usury law (as did other lenders) when they loaned to outsiders; there is no evidence or such violations.

There is a second potential reason for doubting the argument put forth in the text. Since the usury law worked to reduce the total assets of savings banks relative to what they would have been in its absence, its repeal would mean the trustees could allocate more assets—either for unselfish or for selfish purposes. But other evidence not detailed in this paper suggests that Ogden was not arguing for repeal of the usury law to increase his bank's assets. During the pre-Civil War era the Bank for Saving's trustees turned away several million dollars in deposits by enforcing policies designed to restrict wealthy persons from the bank's clientele. As a direct result of these policies, this bank's average balance on deposit was substantially less than that of most other mutuals. See Alan Lester Olmstead, “Mutual Savings Bank Depositors in Antebellum New York,” Department of Economics, University of California, Davis, Working Paper No. 4I, August 1974.

23 From this perspective the usury law, as it operated in antebellum New York, was a perfectly rational instrument of state policy in that it created a more favorable market for the state's debt. In doing so, the law served a purpose similar to the state's Free Banking Act requirements that member banks hold government bonds as reserves. Sylla has analyzed the effects of similar legislation at the federal level. Sylla, Richard, “Federal Policy, Banking Market Structure, and Capital Mobilization in the United States, 1863–1913,” The Journal Of Economic History, XXIX (December 1969), 657–686.CrossRefGoogle Scholar

24 For “arbitrage” to occur the interest rates in other markets would have to rise “sufficiently” above 7 percent to cover transaction costs, brokers’ fees, and the risk of later capital loss.

25 Smith, Walter B. and Cole, Arthur H., Fluctuations in American Business, 1790–1860 (Cambridge, Mass.: Harvard University Press, 1935), p. 125.Google Scholar For a discussion of interest rates in 1848 see: Olmstead, Alan L., “Davis and Bigelow Revisited: Antebellum American Interest Rates,” The Journal Of Economic History, XXXIV (June 1974), 483–91.CrossRefGoogle Scholar

26 Smith and Cole, Fluctuations, Chart 47, p. 137.

27 Although it was argued above that the Bank for Savings was still locked into part of its portfolio, it still held many issues (New York and United States) which were selling at par or above.

28 Mortgage Loans of the Seamen's Bank for Savings, Ledger A (1829–1877), no pages; Beach, Moses, the Wealth and Biography of the Wealthy Citizens of the City of New York (New York, 1849), pp. 13Google Scholar, 21, 23–25. Edward Pessen's newer listings do not significantly change my conclusions. Pessen, Edward, “The Wealthiest New Yorkers of the Jacksonian Era: A New List,” The New York Historical Society Quarterly, LIV (January 1970), 145–172.Google Scholar

29 Mortgage Loans of the Seamen's Bank for Savings, Ledger A (1829–1877), no pages.

30 This is implicit from Payne and Davis’ discussion of the Savings Bank of Baltimore: “One striking feature of the Bank's policy … was the almost unchanged rate of interest (6 per cent) charged on all loans—regardless of to whom they were made, for what period they were made, or with what collateral they were secured. That the rate did not rise above 6 per cent is explained by the fact that this was the maximum permitted under the Maryland Usury Law….” Payne, Peter L. and Davis, Lance E., The Savings Bank of Baltimore, 1818–1866: A Historical and Analytical Study (Baltimore: The Johns Hopkins Press, 1956), pp. 119–120Google Scholar; also Davis, “The New England Textile Mills,” p. 3.

31 Davis, Lance E. and Payne, Peter L., “From Benevolence to Business: The Story of Two Savings Banks,” Business History Review, XXXII (Winter 1958), 398.Google Scholar This difference continued long after the legal constraints on investments became similar.

32 Ibid.

33 Payne and Davis, Baltimore, p. 171.

34 Davis, “Mrs. Vatter on Industrial Borrowing,” p. 225.

35 Davis and Payne, “From Benevolence to Business,” p. 404.

36 Olmstead, “Investment Constraints,” pp. 811–840.